Charts Say ‘Be Long or Be Wrong’

Tuesday started strong due to better economic numbers from China and Germany. But as the day wore on, stocks sagged under the weight of selling in the financial sector and the euro took back some early gains, putting pressure on U.S. stocks.

At the close, the Dow Jones Industrial Average was ahead by 60 points at 12,482, the S&P 500 gained 5 points at 1,294, and the Nasdaq rose 17 points at 2,728. The NYSE traded 810 million shares and the Nasdaq crossed 469 million. Advancers were ahead by 1.6-to-1 on the Big Board and by 1.2-to-1 on the Nasdaq.

Despite threats of a eurozone breakup and more Greek financial tragedies, U.S. stocks just keep chugging along. Yesterday’s new intraday and closing highs by the S&P 500, as well as a matching high in the Relative Strength Index (RSI), confirm that the breakout into a zone with the potential for a very heavy overhead of sellers is no fluke. And yet all of the news is against higher stock prices. Even the U.S. dollar rallied to close higher versus the euro — a pattern that last year would have driven stocks lower.

And one well-known technician studying the AAII bearish investor percentages was surprised that bearish investors are at 17% for the second week in a row. He dug further and was stunned when he found that since the 2000 market peak there have been only 12 other occurrences of this, and the last time was almost six years ago. And yet stocks are making new highs in the face of this extremely bearish indicator.

Another “expert” on CNBC opined that for the last three years the market has been down in the last two weeks of January. But yesterday the market ignored him, too.

When the stock market shrugs off bad news as effectively as this, something is in the wind. Backroom talk of QE3 and a type of quantitative easing inEuropecould be behind the strength.

I’m certainly not privy to the plans of those who move the markets, but I can read the technical signals and they are telling us that being long stocks is the correct position despite the natural tendency to back off. Protect with stop-loss orders but be long or be wrong.